As capital looks to avert shutdown, default looms

Saturday

Aug 24, 2013 at 3:00 AM

JIM KUHNHENN, Associated Press

WASHINGTON (AP) — Congressional Republican leaders and the Obama administration are trying to cut a deal that avoids a government shutdown in October while facing what could be an even bigger fight over the nation's debt ceiling in the rest of the year.

An agreement to keep the government operating at current spending levels through October and November would head off a politically costly disruption of federal services but still leave a clash looming, like the one that roiled the economy two years ago, over a possible government default. Neither party has come up with a way out of a debt showdown.

"Right now there isn't a plan, unfortunately, in Washington," said Sen. Bob Corker of Tennessee, who has been one of eight Republicans negotiating with the White House over the budget. He said lawmakers and the White House can't seem to act until deadlines are at hand and the pressure for a breakthrough is intense.

The double dose of a short-term spending measure that expires in November and a debt limit deadline does create the kind of drama that prompts action.

The coming budget fights mark a new season of uncertainty, which has emerged as an annual rite in Washington. This time the ritual is complicated further by President Barack Obama's pending nomination of a Fed chairman to replace Ben Bernanke, whose term is ending. Investors and corporate leaders, already jittery over a debt ceiling fight, also will be trying to divine what Obama's Fed selection could mean for monetary policy.

"Bernanke's departure is just one more unavoidable source of uncertainty," said Lewis Alexander, U.S. chief economist at Nomura, a global investment bank.

For now, the White House has abandoned its hopes for a large budget deal that would address both increases in tax revenue and reductions in long-term spending on programs such as Social Security and Medicare. Instead, it is proposing an overhaul in corporate taxes to close what it considers loopholes and reduce rates. This would be in exchange for additional spending on public works projects to create jobs.

Republicans are demanding long-term spending cuts, with some insisting that any deal must jettison money to pay for Obama's health care law. The White House argues that the attention on cutting spending is misplaced because the combination of existing cuts, higher taxes on the rich and an improving economy has reduced the deficit.

Without the opportunity to cut a grand bargain on taxes and entitlement spending, however, there are fewer incentives to make a big deal on the debt ceiling and fewer opportunities to attract lawmakers who are reluctant to raise the politically unpopular debt in the first place.

"When we get back to Washington, when Congress gets back to Washington, this is going to be a major debate — it's the same debate we've been having for the last two years," Obama said in Binghamton, N.Y., on Friday. But now, he said, deficits are coming down and "what we should really be thinking about is how do we grow an economy so that we're creating a growing, thriving middle class, and we're creating more ladders of opportunity for people who are willing to work hard to get in the middle class."

The budget year ends Sept. 30 and Congress and Obama need to find a way to continue paying for government operations or force a shutdown.

The next crucial deadline is when the government hits its current debt limit, expected sometime in November. If the debt ceiling is not raised, that means the government would default.

The result would at least halt payments of military salaries, and Social Security, Medicare and unemployment benefits, among other government programs. At worst it would reverse the economic recovery. In 2011, Congress raised the debt ceiling just hours before a default would have kicked in. The close scrape prompted Standard & Poor's to downgrade the government's debt for the first time in 70 years, making borrowing more expensive.

White House officials have scheduled a meeting Thursday with the eight Republicans senators who have been consulting with Obama and his advisers on the budget. It will be the first time in four weeks that the senators and White House have met.

House Speaker John Boehner, in a teleconference with House Republican lawmakers Thursday night, proposed a short-term continuation of government operations at current spending levels, which include the automatic spending cuts that took effect in March but would not include cuts scheduled to kick in at the beginning of next year. The White House seems amenable to that idea as a stopgap measure.

But Boehner's suggestion is not a sealed deal. In a letter to Boehner and House Majority Leader Eric Cantor this week, more than a third of House Republicans called for cutting off money for the health care overhaul, even in a short-term spending measure. A small group of Republican senators, led by Ted Cruz of Texas, is pressing for the same thing.

Corker, for one, dismissed those demands. "Most people realize that that is sort of a fringe effort that is not going to be a central part of these discussions," he said.

Obama has insisted he will not negotiate on the debt ceiling. But the confluence of events this fall will make it hard to separate that deadline from a budget deal.

Corker said the "no negotiation" stance of the White House is merely rhetorical.

"Why are we talking right now?" he asked. "Deadlines help focus people's minds. We don't sit around talking about the deadlines. But let's face, it, the funding of government next year and the debt ceiling issue, of course that's what driving these conversations to take place."